NSE Post Takeover: A Whole New World-Reimagining Endless Possibilities

Wednesday, September 23, 2020 05:10 AM / by Proshare Research/ Header Image Credit: EcoGraphics

Stockbrokersare likely to fade away. The world of the future is one in which artificialintelligence (AI) will rip holes in the business of traditional securitytraders as investors receive reports quickly and seamlessly from mobile devicesas market updates, business news, corporate features and financial statementsupload in regular loops as information becomes available hourly. AI wouldlikely crawl information that meets the preferences of each service subscriberand provides clients with the information they require in pre-specified"buckets".

Inthe new order, analysts would only need to 'spec' or spell out periods requiredfor data analysis on such metrics as quarterly GDP growth, monthly inflationrate and daily foreign exchange rates with appropriate charts displayedinstantly as analysts give insights into trading patterns and investorbehavior. According to Chris Okenwa, Managing Director, FSB Securities "the 'market place' as we know it would become an information sandbox filtered toassess value, risk and returns. The new concerns would no longer be aboutbrokers but investment/market strategists and their strategies. The whitespaces of access to timely market information would have been filled bytechnology, hence making the forward play a matter of information processingand investment positioning".

Inits latest Online Trading PortalRanking Report 2020 Proshare notedthat "with the timeliness of transactions becoming just as important as theparticular assets traded, trading houses have had to improve the quality oftheir platforms in terms of data processing, research, customer interaction andgenerational segmentation. This has created a sort of J-Curve pattern whereservice delivery quality at the point of transition or upscaling of digitaltrading transactions shows early signs of difficulties with service qualitywhich dip briefly at the point of the first-stage implementation and thenimprove exponentially" (see illustration 9).

Illustration 9: Climbingthe Digital Trading Curve

TheReport goes on to note that "AI can be used forthe identification of arbitrage. This is a case where investment managers canpotentially take advantage of differing prices for the same assets in differentmarkets. It can search for such arbitrage opportunities and list them out tothe investor in their dashboard'. The arbitrage trading improves market pricingefficiency and closes market gaps" (see illustration 10).

Illustration 10: AI the NewKing of The Arbitrage Game

TheNSE's proposed foray into the derivatives market will create broader assetclasses that would enable investors to balance out their asset portfolios in amore clinical manner. Staying stuck in the water will be an increasinglydangerous place to be as market technology sprints ahead and aligns with thepreferred journey experience of financial asset traders and clients. Advisoryservices will be on the uptick as investors fact-check their marketintelligence and broaden their market insight based on traders/analyst'sexperience. Traders/analysts that do not catch up with client's knowledge ofemerging real-time market developments could just as well stay at home sulkinginto their coffee mugs as clients, fees and revenues disappear (see illustration 11).

Illustration 11: AI and The Beauty of Analysis

Theemerging changes in customer trading preferences and expectations may explainthe decision by the Chartered Institute of Stockbrokers (CIS) to change itsname to the Chartered Institute of Securities and Investments (CISI). Theproposed name change is understandable but the regulatory framework through aproposed bill sponsored by Senator Ganiyu Solomon has areas that needrevisiting. The bill seeks to repeal the Chartered Institute of StockbrokersAct Cap C.9 LFN 2004.

CIS "Market Capture", the Guerilla Strike

Thebill is flawed on many fronts is an audacious attempt at professional "marketcapture" and monopoly conduct. The bill in Part 1 notes among other mattersthat:

(1) the principal objectsof the Institute shall be:

(a) To advance, direct the theory and practice of securities issuance,dealing, investment management and advisory services.

(b) To determine the standard of knowledge and skill to be attained bypersons seeking to engage in, and practice in the Securities and Investmentbusiness in the Capital Market in Nigeria, to become registered members of theInstitute, and to raise those standards from time to time as circumstancesdemand.

What2 (1) (b) means is that the only body recognized to approve professionalcertification of investment and securities practitioners in Nigeria is theCISI. The section is a breach of the very essence of investment market practicethat emphasizes:

Market efficiency
Price discovery
Competition
Portfolio diversification
Risk mitigation

Professionalbodies cannot be laws unto themselves determining the professional livelihoodsof capital market practitioners. The bill shows a clear overreach whereby somestrange interpretation of financial terminology the "stock market" has becomeequated with the "capital market". The stock market has traditionally andglobally been seen as a subset of the capital market which includes the fixedincome market, commodities market and the alternative investment markets suchas real estate and asset derivatives.

Thebill as presently drafted by Senator Solomon brazenly attempts to collapsedifferent markets under one omnibus professional body which would be aprofessional 'god' similar to the situation where an Institute of CharteredAccountants of Nigeria (ICAN), for example, decides to include areas of tax andtax administration, financial costing, financial management, financialstatement and investment analysis and perhaps corporate ethics as part of itsexclusive professional preserve and insist that individuals who embark oncareers in investment analysis or reporting, investment management, costmanagement, financial management and taxation should be officially registeredand recognized as members of ICAN.

Thesituation would quickly and easily have been considered a gross breach ofglobal best professional practice and conduct. Indeed, presently in Nigeria, anaccountant can be registered with the Association of National Accountants ofNigeria (ANAN) and those wishing to stretch their expertise to taxation canregister with the Chartered Institute of Taxation of Nigeria (CITN) separately.Indeed, the CITN has an arrangement with the Association of Certified CharteredAccountants (ACCA) that allows ACCA members to become CITN charter membersafter a Nigerian tax examination has been sat for and passed. To add anotherlayer to the collaboration amongst finance/accounting professionals, qualifyingwith an ACCA charter allows a charter holder to sit for an MSc. Programme ofthe University of London while in Nigeria. The programme would last for sixmonths and the degree is of the same standard and international recognition asa regular MSc programme at the British University.

TheCISI bill is, therefore, a rather grotesque contraption alien to the freemarket spirit upon which investment and securities trading is based and may bemisconstrued as an effort by a narrow group of vested-interests to compelinvestment professionals with various other Charter memberships to be subjectto fees and levies that would be replicated in other professional bodies. Thebill is a clear stab at the principle of the free buyer and free seller andthrows dirt into the eyes of the concept of market equity and fairness.

Tomake matters worse the drafters of the CISI bill appear to have skidded intothe trap of arrogance and hubris when they either wittingly or unwittinglyundermined the existing laws on investment market adjudication and resolutionwhen they attempted to negate the relevance of the existing Investment andSecurities Tribunal (IST) established by section 244 of the Investment andSecurities Act (ISA) 1999 (now section 247 of the ISA 2007). The new draft billof the proposed CISI states in Part 7 section 13 (1-6) whichdeals with Professional Discipline, as follows (see illustration 12):

Illustration 12: CISI's ProposedDisciplinary Process

13.-(1) Thereshall be constituted a body to be known as the Chartered Institute ofSecurities and Investment investigating Panel (in this Act referred to as"the investigating Panel") which shall be charged with the duty toChartered Institute of Securities and Investment (Establishment, etc) Penaltiesfor professional misconduct

(a) conduct a preliminary investigation into any casewhere it is alleged 1 that a member of the Institute has misbehaved in hiscapacity as a member or shall for any other reason be the subject ofproceedings before the Disciplinary Tribunal;or

(b) decide whether the case should be referred to theDisciplinary Tribunal or not; or

(2) The Investigating Panel shall be appointed by theCouncil as prescribed in the Regulations of the Institute.

(3) The Council may make rules not inconsistent withthis Act as regard acts which constitute professional misconduct.

(4) The Investigating Panel shall act independently inreceiving and investigating allegations under paragraph (a) of subsection (I)of this section and shall have power to receive complaints directly from anyindividual or organization.

(5) There shall be established a Tribunal to be knownas the Chartered Institute of Securities and Investment Disciplinary Tribunal(in this Act referred to as "the Disciplinary Tribunal") which shall be charged withthe duty of considering and determining any case referred to it by theInvestigating Panelconstituted under Subsection (1) of this section.

(6) The investigating Panel and the Disciplinary Tribunal shallconsist of such number of members with such qualifications, appointed by theCouncil in such manner and to hold office for such period and on such terms andotherwise as the Regulations of the Institute shall direct.

SenatorSolomon's effort at pushing a bill that castrates professional competition isodd and worrisome as it tallies with an emerging narrative of a drift towardscentral control and management of the economy by creating a multiplicity ofmonopolistic structures. Currently, the Nigerian National Petroleum Corporation(NNPC) is the primary importer of refined petroleum products thereby making ita near-monopoly supplier of refined white oil products in the domesticdownstream wholesale market. The Central Bank of Nigeria (CBN) is the primarysource of foreign exchange supply to the domestic economy, therefore, making ita near-monopoly supplier of foreign exchange. The electricity distribution companies(Discos) in various parts of the country are monopoly distributors of powersupply to manufacturers, households, and other economic agents. The canopy ofmonopolies thrown over the economy may create a massive wave of pricinginefficiencies across domestic markets leading to rampant corruption,inexcusable product/service rationing, resource misallocation, and destructionof service delivery quality.

Thedesire for the CIS to upgrade its curriculum and the quality of its marketintervention is laudable but its attempt at swiping a guerilla claw at the veryheart of free-market enterprise upon which securities and investments arebased, at best is dubious and at worst represents a horrendous attack onprofessional market practices and institutional integrity.

Thedesire of the CIS to improve the quality of financial market professionals isdesirable and applaudable but in doing this allowing the organization tocontrol the buy and sell-side of the capital market would be undesirable andwould breach the standard of care embedded in the financial marketagency functions. It is an implausible argument for the proposed CISI toprovide oversight over the buy and sell-side of financial transactions, more sothat this would be usurping the regulatory functions of the SEC (an argumentthat is represented and reflected in the conflict between SEC's IST and theproposed CISI's Disciplinary Tribunal).

Whileprofessional institutions such as Nigeria's Corporate and Individual InvestmentAdvisers (CIIA) may see merit in the total control of the sell side of thecapital market by the proposed CISI, many analysts demur. Local capital marketanalysts spoken to for this report insisted that an omnibus institutioncontrolling the supply side of the entire capital market has no precedenceanywhere in the world, and represents a brazen overreach by an institute whoseprimary mandate was the training of stockbrokers for the stock market and notthe training of all capital market professionals. They argue that if the CISIwas passed in its current form professional members of the Chartered Instituteof Bankers who have Corporate Finance responsibilities in their respectivebanks would have to become members of the CISI to carry out their legitimatebanking functions even if they have no interest in being stockbrokers.

Indeed,Charter holders of the CFA Institute (the world's premier and largestInvestment Institute) would also be herded into the CISI program and made toregister with a local institute whose certification would be in competitionwith the CFA Institute locally but would have no professional tractionabroad.

Theinformation available to Proshare suggests that the CFA Society of Nigeria hasdeclined to be affiliated with the proposed CISI. This is understandable as thelocal affiliate of the international institute noted in a letter to the CISsome salient points. The bill as proposed by Senator Solomon would virtuallyensure that the CISI would:

Become a monopoly in directing the theory and practice of Securities and Investment in Nigeria [2(1a)]
Compel all practitioners in the Securities and Investment business in the Capital Markets of Nigeria to become its members [2(1b)]
Be the sole entity for certifying prospective practitioners and those already practicing in the industry [2(1c)]. [2(1f)] and [2(2c)]
Determine individual and institutional Capital Market Operators [16(1)] for the purpose of compelling them to become its members
Commit investment professionals who are otherwise qualified but elect not to become members of CISI to jail and/or fine [18(1)]

The letter also noted that the Chartered Institute of Securitiesand Investments (CISI), United Kingdom, has applied for recognition to acredential in Nigeria but has not requested for a monopoly position thatexcludes other professional financial Institutes, this is in line with bestglobal corporate practices.

Obviously, in an enlightened 21^st CenturyNigeria allowing the creation of a Godzilla professional institute has no placein the statute books. TheFederal Competition and Consumer Protection Council (FCCPC) needs to brace up to its responsibilities and engagethe promoters of the CISI bill in a market-friendly discussion to revise thecontents of the proposed law in a way that does not create a professionalmonopoly that could hurt consumers of professional investment education andknowledge.